Paying loan more than the monthly limit vs keeping the extra in a bank or investment

I have a student loan (9% interest rate) which I have to pay within the next two year. Since I have a secure job I know I will finish paying within two years even with the minimum monthly payment. However, to lower the total amount I will pay at the end of the 2 year, I was planning to pay extra every month (a couple of hundred dollars) and finish it early. However, I also come up with the idea of investing the extra cash I planned to pay every month instead of putting it to pay the loan.

Assuming that the investment will have a positive outcome, is it better to invest the extra cash, keep it in bank, or add it to the loan to finish it early?

UPDATE:**Thank you everyone for your response. I am obligated to pay the loan within two years. If I pay the monthly minimum amount the interest rate at the end of the 2nd year will be between $2500-$3000. However, I know that if I pay more than the minimum amount, the interest rate will be lower. But, how do I calculate how I would be saving lets say if I pay $200 extra each month or $3000 once? Or how much should I pay extra each month if I want to save $1000 from the interest?

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4 Responses to “Paying loan more than the monthly limit vs keeping the extra in a bank or investment”

The others nailed it, great answers.
I’d add – the two things I’d prioritize ahead of this debt, higher interest debt, obviously. And matched 401(k) deposits. I can’t repeat enough – many people are so anti debt, they walk away from guaranteed 100% returns. “after I pay my mortgage, I’ll max out my 401(k) and catch up.” I’ve read this, and it will never make sense. After that, pay off the 9% rate as soon as you can.

What everyone else is missing is that it’s 9% paid with after tax money. Any income you earn on an investment will also be taxed, so you’d need to make a fair bit more than 9% in order to break even with paying off your loan.

For example, if your tax bracket is 20%, you have to earn $1.36 for every $1 in loan payment.

Take $100 x 0.09 x 1.36 = $12.24 in pre-tax earnings just for interest every year on $100. Multiply that out for whatever the size

Your rate of return for paying off this loan is 9%, and that’s guaranteed. For reference, the best rate of return on a 10-year FDIC-insured certificate of deposit today is 3%.

There’s definitely something out there with better returns than paying off your loans, but there’s definitely not going to be anything with better risk-adjusted returns than paying off your loans. Investors dream of guaranteed 9% rates of return.

If you had something that could provide a guaranteed 9% rate of return, wannabe investors would be lining up at your door and tripping over each other to outbid each other until it actually closer to a 3% rate of return. 😛

(Postscript. Depending on whether your loans are tax-deductible and what your inflation expectations are, you could adjust those rates to make the comparison more accurate. But at 3% vs 9% the picture’s pretty clear.)